Goldman Sachs: Strong Data Center Orders, Maintain Buy on GDS/VNET
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Goldman Sachs: Strong Data Center Orders, Maintain Buy on GDS/VNET
Despite Q1 capacity delivery slowing due to seasonality and chip constraints, strong orders driven by increased capital expenditure from hyperscalers support maintaining Buy ratings on GDS and VNET.
- Maintain Buy ratings on GDS and VNET; GDS target price lowered to ADR $49/H Share HK$47, VNET target price raised to $16.
- Strong sector orders; YTD orders of 346MW for GDS and 519MW for VNET, primarily from hyperscale cloud customers.
- Slower occupancy growth and MSR pressure in GDS China offset partially by higher valuation of its overseas DayOne assets.
- VNET brings CATL as strategic investor, eliminating uncertainty over shareholding changes; wholesale IDC business growth accelerates.
- Expected recovery in domestic chip shipments (e.g., Cambricon, Biren) in H2 to drive improved capacity utilization rates.
Report interpretation
Overview
This report reviews the Q1 2026 results for GDS Holdings and VNET Group. Despite a slowdown in live capacity expansion and customer move-in speed due to seasonal factors and domestic chip supply constraints, institutional sentiment remains constructive toward the data center sector. The core drivers include significant increases in capital expenditure by hyperscale cloud providers (Alibaba, Tencent, ByteDance) and strong order acquisition capabilities by both companies. Goldman Sachs maintains a 'Buy' rating on GDS and VNET but lowers GDS's target price based on slowing China business growth and pricing pressures; conversely, it slightly raises VNET's target price due to strong execution and the introduction of CATL as a strategic investor.
Core views
Sector demand conditions remain robust. The report notes significantly rising capital expenditure by hyperscale cloud providers, with projected combined Capex of $48bn/$53bn for Alibaba/Tencent in 2026/2027, and ByteDance potentially reaching $70bn/$100bn. This demand directly translates into orders for data center operators, with GDS securing 346MW of IT power commitments and VNET securing 519MW year-to-date, mostly from hyperscale clients. These orders lock in long-term resources for several years ahead, although conversion to revenue typically takes 6-8 quarters. GDS Holdings: China Business Faces Pressure, Overseas Asset DayOne Gains Value. GDS China operations were steady but slightly weak in Q1, constrained by slower customer move-in rates (16,000 sqm in Q1 vs. 18,000 sqm in the prior quarter) and declining Average Selling Price (MSR). The report forecasts GDS China MSR to decline YoY by an average of 4% annually from Q2 2026 through Q4 2027, pressuring EBITDA margins. However, GDS's stake in the overseas data center platform DayOne (19.9% holding) performed strongly, with Q1 revenue and adjusted EBITDA growing 234% and 375% YoY, respectively. Given DayOne's strong order commitments and capacity expansion (projected committed capacity of 2.2GW by end-2026), Goldman Sachs significantly upgraded the valuation of DayOne, offsetting part of the downgrade to GDS China business valuation. Consequently, GDS ADR target price was reduced by 11% to $49, and H shares by 13% to HK$47. VNET Group: Strong Execution, Strategic Capital Injection Removes Uncertainty. VNET demonstrated faster customer move-in rates in Q1, adding 64MW of utilized capacity to reach a total of 687MW (YoY +57%). The company successfully introduced CATL as a strategic investor, not only alleviating market concerns regarding previous shareholder changes but also bringing synergies in energy storage battery systems, high-voltage DC transmission (HVDC), and green power supply. Goldman Sachs believes VNET is transitioning from a traditional retail IDC operator to a rapidly growing wholesale IDC operator, with projected CAGR of 37-38% for wholesale IDC revenue and EBITDA from 2025-2028. Therefore, we maintain the Buy rating on VNET and slightly raise the 12-month target price by 3% to $16.
Analysis framework
The institution uses a Sum-of-the-Parts (SOTP) valuation method for GDS, splitting it into GDS China operations and the overseas DayOne business, applying a controlling interest discount. For GDS China, a 2027 expected EV/EBITDA multiple of 13.5x is applied; for DayOne, a 2027 expected EV/EBITDA multiple of 23x is used. This analysis method more accurately reflects the value of assets with differing growth characteristics and risk profiles. For VNET, a single forward EV/EBITDA multiple method (12x 2027E EBITDA) is adopted, focusing on the compounding effect of overall profitability and potential valuation re-rating. Additionally, the report analyzes the relationship between short-term performance volatility and long-term growth certainty by tracking the time lag between 'order intake', 'committed capacity', and 'live capacity'.
Methodology notes
Sum-of-the-Parts Valuation
Valuing different business segments of a company (such as GDS China and overseas DayOne) separately before summing them up, suitable for diversified companies with significant differences in nature, growth rate, or risk profile, enabling more precise extraction of hidden value.
EV/EBITDA Enterprise Value Multiple
The data center industry is asset-intensive with significant depreciation and amortization; using EV/EBITDA rather than P/E better eliminates the impact of capital structure and depreciation policies, reflecting core operating cash flow creation ability.
Data Center Supply-Demand and Capacity Conversion Cycle
Focuses on matching upstream cloud provider capital expenditure (demand) with data center construction cycles (supply). The report emphasizes that new orders take 6-8 quarters to convert to revenue, explaining why strong orders may coincide with short-term performance impacted by capacity delivery rhythms.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- GDS Holdings (GDS.US/9698.HK)Beneficiary, Leading neutral data center operator in China
- Strengths
- Largest developable capacity platform in China, robust balance sheet, holds high-growth overseas asset DayOne (19.9% stake)
- Weaknesses
- High downward pressure on MSR in China business, slower-than-expected customer move-ins
- Comparison
- Compared to VNET, GDS has a more international asset portfolio (DayOne), but faces more immediate pressure from its China-local business
- Risks
- Occupancy rate improvements below expectations, slow ramp-up of overseas business, worsening pricing trends
- VNET Group (VNET.US)Beneficiary, Operator transitioning to wholesale IDC
- Strengths
- Excellent Q1 execution, fast move-in rates, CATL introduction brings synergies and confidence boost
- Weaknesses
- Traditional retail business may continue to decline
- Comparison
- Greater potential for valuation re-rating, significant profit compounding effect, resolved concerns over single shareholder changes
- Risks
- Insufficient financing capability, order execution below expectations, changes in AI model training demand
Key data
- GDS YTD Orders346 MWPrimarily from Langfang, Changshu, Taicang, etc.
- VNET YTD Orders519 MWAll located in the Greater Beijing Region
- DayOne Q1 Revenue YoY Growth+234%Strong overseas business growth
- DayOne Q1 Adj. EBITDA YoY Growth+375%Significant improvement in profitability
- GDS ADR Target Price$49Down 11% from prior, implying 39% upside
- VNET Target Price$16Up 3% from prior, implying 51% upside
- Hyperscale Cloud Provider Capex ExpectationAlibaba/Tencent 2026E $48bnByteDance 2026E may reach $70bn
Impact & implications
The report suggests that while GDS China faces pricing pressure and slowing occupancy in the short term, the revaluation of its equity stake in DayOne provides important stock price support and upside potential. For VNET, introducing CATL not only improves expectations for capital structure but also offers a competitive advantage in energy solutions required for AI data centers, aiding in expanding its market share in the wholesale IDC space. Overall, the data center sector benefits from long-term structural growth in AI computing power demand, with leading operators enjoying sector tailwinds over the next few years by locking in long-term orders and reserving resources.
Risks
- Customer move-in demand and occupancy rate improvements below expectations
- Overseas revenue/profitability ramp-up slower than expected
- Pricing trends in China and overseas markets below expectations
- Customer churn
- Deleveraging process slows down
- Inability to provide sufficient financing for growth targets
- Geopolitical risks (particularly related to AI sectors)
What to watch
- Recovery in domestic chip (e.g., Cambricon, MetaX, Biren) shipment volumes in Q2 and H2
- Net Move-in areas for GDS and VNET in subsequent quarters
- Progress of capacity expansion for DayOne in overseas markets (Indonesia, Europe, Latin America)
- Specific implementation of cooperation between VNET and CATL in energy storage and green power